AMCON and Financial Services Debt Burden in Nigeria

The history of economies is best captured by business cycle. It reflects the grim reality that the seed of every burst is sown in its bubble. Every prosperity leads to an uptick in asset prices, and with time moral hazards are piled up.

Though, monetarist over the years have consistently harped on the notion that prosperity must be effectively managed to avoid being caught up in a hard landing scenario.

Recently, tilting towards a more forward-looking approach, Central Banks all over the world have come to terms. In their own way, they are creating mechanisms on how best to combat the next bubble that have become especially in a period of boom.

The grim reality is that bubbles have become a grim reality. Stunningly, both spleen of economics and finance have come to terms that such bubbles turn out to be a necessary correction to asset prices.

Recently, the cycle of bubbles and burst has become shorter. In reality, financial stability has become more cumbersome in the long run. No doubt, this tale brings back the memories of the 2008 banking crisis coupled with the policy response in reaction to the systemic shock.

Therefore, this edition of Proshare Confidential takes an in-depth study on the systemic shock that led to the formation of an Asset Management Company (AMC). The kind of AMC, Nigerian at this point, is practicing and the grey areas patterning the eclipse of the going concern of the AMC.

However, policy response at that time was intended to avoid an inflammation in the downturn which could result in short term problems becoming a long term one.

Such
response gave birth to an Asset Management Company, which was named as the
Asset Management Company of Nigeria (AMCON). Certainly, like all asset
management company, AMCON is also a child of consequence, one born with the
intent to detoxify the system.

AMCON
was poised with the responsibility of taking away bad loans out of the system.
Such action calm nerves around the standing lending facility corridor. In a follow
up, the overnight rate was tampered down a bit as the AMC untangled
the existing liquidity crunch.

In
addition, AMCON was given the responsibility to restructuring through re-
discounting capital base of bank to nil. Thus, AMC acted as a leg room
for the economy by bolstering credit to the private sector, eventually ensuring
that money not dented by the shock.

The
intermediate objective of averting wider contagion by
increasing money supply and providing a
breather for pro-cyclical lending which allowed the GDP to grow by
7.2% a year after the creation of the AMC.

The
AMCON Act 2010 was established and empowered with the ability to tap into money
market. Therefore, AMCON raised a N2.3 trillion bond, which was to be refinanced
at a rate of 12%. Such amount raised was referred to as a sinking
bond, thus putting the corporation in a position
of substantial financial leverage. The Federal Government and the Central
Bank injected N10 billion and N500 billion respectively

Even
though such act further encouraged supply following finance after the bond was
raised. Although, it was not fully guaranteed by the Federal Government which
in return also increased the total Public Debt to GDP.

Sinking
Fund Explained

The
sinking fund was tied with the margin of growth in the asset base
of the Deposit Money Banks (DMBs) modelled around a historically growth pattern
of 20% over the years, however the thin growth in GDP has slimmed down the
growth in the asset of banks.

More
importantly, the super-normal growth level
experienced have largely faded off thus threatening
the ability to fill the sinking fund. One thing was certain
that the model failed to take into account the diminishing marginal return to
scale.

Fig
1: Bank Assets from 2010 to 2017 (N’trillion)

Source: CBN

Certainly,
the marginal growth levels of banks will dip at some point and
diminishing returns will play out. Ignoring
revenue in the model, no doubt, made the sinking fund a quick sand
scenario.

What
is even more disturbing is that the model failed to consider macro imbalances
and structural break-out. According to our estimates, our optimistic position
based on the purported model showed that it will take 18 years to
fill the hole.

No
doubt this model highlighted the limitation of asset-based model. The prompt
repayment of such loan in accordance with the given framework is obviously
blurred; there is a need to redeem such loan by the Apex Bank in
tranches.

Thereby,
levying it on the profit of the Deposit Money Banks in piecemeal provides
headroom for the AMC balance sheet. With the exhaustion of asset
for sale and rising debt issuance, financial leverage has shot up to
80%.

Banks
Transfer

Deposit
Money Banks are institution entrusted with the hope and fate of ordinary
folks. They are regarded as the trustee of their hard-earned income and
sweat, there is no greater honour than that.

Thus,
the transfer of financial institutions must go beyond the highest bidder.
Besides they are not durable items or luxury items like paints works.
Obviously, they are not bought for fancy, but to save guard
deposits, maximize existing shareholders’ wealth, create fresh wealth and
deepen financial inclusion.

In
reality, they are livid columns of any economy. Therefore, it is pertinent that
the transfer of banks must go beyond the bidding prices. It must include the
micro prudential, capacity and track record of the buyer.

Sometimes,
price could be a smoke screen, which leaves the financial system in a more
delicate position than it was. Our inability to allow a balanced approach that
involves both quantitative and qualitative indicators have created
a scenario whereby dead wood still persist.

Truth
be told, the cobwebs still hang in our financial system. In addition,
there is need to strengthen the Nigerian Deposit Insurance Corporation (NDIC)
Act as the banking system have gone through substantial evolution since 1991.
After all, empowering the NDIC in the first place would
have reduced the occurrence of grey areas or avoid committing the phenomenon of
the original sin in the first place.

One
wonders if a law that empowers the Nigerian Deposit Insurance Corporation
(NDIC) allows it to give a bridge bank licence. Why can’t the Nigeria Deposit
Insurance Corporation wean the bank? By doing so we can limit the room
for multiplicity and accumulated losses being witnessed.

In
climes like Turkey where the savings deposit fund played a big role in averting
deposit runs and also stabilizing the economy. Certainly, having an NDIC
that can live up to such billing will be in the best interest of the
economy.

Financial
Statement

The
huge leverage position of the firm has continued to put net income of
the corporation under severe pressure, thereby
resulting into a negative net interest position .
The limited fee
due to diminishing scale, macro
imbalances and the tight monetary policy has made the gulf between
interest free and interest expense inevitable.

The
AMCON scenario clearly point out the damage of huge leverage position
coupled with high cost of debt
and transferred macro imbalances on net interest
income.

Although
other income is a major source of income, given its wide mandate. The buffering
in net trading, accretion in fair gain value and bolstering net gain,
crystallized a departure from the norm of net operating loss.

Therefore,
recording N26 billion in net operating profit. However, the surge in operating
expenses triggering a N56.2 billion negative Earnings before Income and Taxes
(EBIT) reflective of a 33% dip in loss. However, the disposal gain of N46
billion depresses the headline loss to
N16.4 billion.

The
firms cost of equity according to the net income approach puts it at 0.26% and
a negative weighted cost of capital at -0.1%. Even though the corporation
recorded positive net operating profit, the high financial dragged down
WAAC.

Although,
the corporation has served as a macro stabilizer, but the opportunity cost to the
firm has been raising losses. It also shows that for an AMC birthed to detoxify
the financial system, there is a very dim possibility of the
corporation having positive Economic Value Added (EVA).

Therefore,
the Economic Value Added so far has been negative. Certainly, the
corporation is dwindling it balance sheet and reducing its losses.
However, a more aggressive approach so as to diverge from the usual trend
accumulating loss. More importantly, it has to dilute
its leverage, it’s not healthy for the
earnings, especially when current asset meant for
disposal is
not.

Conclusion:
White Noise of Eclipse

In
fairness, there is no 10 years eclipse in the AMCON Act, rather such perception
is drawn from the National Asset Management Agency (NAMA) of Ireland which has
a 10 year lifeline. AMCON is similar to NAMA, besides they were birthed around
the same time. While we do admit the reality of business cycles, with the
revolving door scenario and the existing macro imbalances, more than ever,
there is a need for an AMC.

However,
a two-case scenario, the tail scenario is one whereby the value of the AMCON
ends up been an arm of NDIC. Just like Resolution Trust Corporation which
later became a division of the Federal Deposit Insurance Corporation. The
head scenario revolves round the corporation becoming more independent and
winding down its balance-sheet. Moreover, rather than reward moral
hazard, it must restructure its capital and be more profit oriented.
Anything less will be self-injurious in the long
term.